Oxford Economics: Payroll Tax Best For Tourism

Thursday, 22 May 2014 10:10
News Editor

A study from the Coalition for Responsible Taxation has provided evidence that a payroll tax at six percent would be significantly more beneficial for the country’s number one industry – tourism – than value-added tax, involving less of an “inflationary shock” in the short term, while ultimately achieving a similar level of debt reduction in the long term.
The report, compiled by global forecasting and quantitative analysis firm Oxford Economics for the coalition and released yesterday, shows that more so than a VAT at 15, 10, or 7.5 percent, or a payroll tax at 12 percent, a six percent payroll tax would protect the competitiveness of the tourism sector, allowing it to grow the most over the short, medium and long term (to 2024).

The report further shows that the hotel and restaurant sector will grow “notably faster”, at around 0.5 percent more per year, in an environment where a payroll tax at six percent is introduced, as compared to one where VAT at 15 percent is brought in.

In contrast, a VAT is anticipated to slow the economy more and cause an inflationary spike of 6.5 percent in the short-term, while in the long-run having a similar impact on debt reduction as a payroll tax and a less harmful effect on household spending.

A payroll tax system would also lead to slower private consumption growth generally, impacting household incomes more heavily, the report found.

These findings were revealed in Oxford Economics’ assessment of the macroeconomic implications of alternative strategies for debt and deficit reduction in The Bahamas. The long-awaited study, which began in March and was commissioned by the private sector coalition, looks at six different possible tax and spending scenarios, of which the “baseline” case was the initially proposed 15 percent VAT with a wide range of exemptions.

The findings point to the challenge and the trade-offs that the government will face as it decides which tax reform path to pursue. The coalition has yet to finalize its formal recommendations to government on what path to debt reduction it believes it should pursue, it noted yesterday in a release, but plans to do so within the next 10 days.

Within the study, all of the scenarios produce a large reduction in debt over the next 10 years, reducing the debt-to-GDP ratio to between 33 and 43 percent by 2024, except a VAT at 10 percent with a wide range of exemptions. The latter scenario fails to achieve a significant debt reduction, and debt begins to climb again within several years.

However, a critical observation made is that there are “alternative implications for consumers and producers, small versus large corporations, poor and rich households, different sectors of the economy, et cetera” under different tax scenarios.

“Private sector growth will be boosted by a strategy that includes expenditure as well as purely revenue-raising measures. Tourism-facing industries, most notably hotels and restaurants, would fare better from the introduction of a payroll tax compared to VAT, other things being equal,” notes the report. “Households will be worse off under a payroll tax compared to VAT, with net take home pay affected directly by employee contributions, and indirectly by employer contributions, as firms seek to shift the incidence of the tax back on to workers over time.”

Bowe said: “Now you have sufficient data to say, what are the positions I want to take? Do I want to sacrifice employment to keep (inflation) down, or do I sacrifice (inflation) reduction to keep employment up?’ None is right or wrong, it’s about how do I keep the economy moving forward. While all of the scenarios will move us towards debt reduction, it’s to evaluate the impact of getting to that level.”

Significant differences also emerge with respect to the initial effect on growth of each of the tax scenarios.

A VAT would slow the economy more in the short term, however in the long run, there is a much smaller difference.

Bowe told Guardian Business that the results of the study were “fairly consistent with what we’d anticipated by and large” although he admitted it was “interesting” to discover that all of the scenarios have broadly the same effect on debt reduction and the key economic indicators in the long run.

“When you look at it, government spending and contraction would be a key component. Those scenarios that assume a reduction in spending and increase in compliance, those have a more substantial impact; I think that’s consistent and doesn’t need empirical analysis, you have to get government spending under control.”

Contacted yesterday on the findings of the Oxford Economics study, Suzanne Pattusch, executive director of the Bahamas Hotel and Tourism Association (BHTA), said: “The BHTA and the tourism industry have not yet finalized our research and recommendations. We recognize the pros and cons of various alternatives and will recommend solutions which work in the interest of our industry and the entire country. We are still in the process and believe it would be premature to comment or answer questions at this time.”

The BHTA has commissioned its own study on the impact of VAT on the sector, and possible alternatives, which is expected to be released shortly.